William C. Fisher
Here are more questions/potential conflicts the CFO should be asking about investments:
Are you using floating benchmarks? There are many indexes by which investments can be evaluated (Dow, NASDAQ, Russell, etc.). If the index is not written into the investment policy, the money manager has the liberty to change it. If the benchmark changes, your reporting may show the investments are okay when they are not. Work with static benchmarks.
Are you objectively evaluating your money manager? Our firm and its affiliate partners are relational. We want to know about your kids, your church and what is happening in your life. Knowing and liking an investment advisor is not the board's job. When we ask clients why they do not fire underperforming money managers, they often say it is because they like the person or the money manager is a loyal donor to the organization. Objectivity is the primary responsibility of fiduciaries.
Are you evaluating your investment performance using net returns? Many money managers report gross returns. I strongly recommend all reporting be presented net of all costs. Investment fees should be fully disclosed, including any portion of the fees that is returned to the organization or paid an advisor within the organization (like a trustee).
Most CFOs think this cannot happen at their organization. However, it was recently reported that Dartmouth College trustees (who oversee an endowment of $3.4 billion) are under investigation by New Hampshire's attorney general.
Joshua Humphreys, a fellow at Tellus Institute, reported that his study of endowment investing showed Dartmouth had an unusually high number of trustees and investment committee members involved in running money for the university. He is calling it a “crisis of stewardship” and says stewardship is not independent because so many people on the committees are making money from the university.
The CFO is well served by heeding these potential conflicts while managing the investments.